Across our core sectors of energy and infrastructure, boards are grappling with the fallout of the coronavirus pandemic and the severe impact this is having on short to medium term liquidity and business continuity. Looking beyond COVID-19 however, the macro-economic factors challenging those in the oil and gas industry specifically are profound, with the industry facing a systemic imbalance between supply and demand and a widespread need for restructuring of balance sheets.
Very early during the 2014 downturn, we witnessed a rapid and sustained increase in the demand for non-executive directors and executive chairs. This was particularly prevalent in private equity portfolio companies and was driven primarily by an acute need to add seasoned industry expertise to help navigate what was unchartered territory for many executives leading businesses at the time. The fall in oil price was steep and persistent; the 70% drop was one of the three largest declines since World War II and the longest lasting since the supply-driven collapse two decades earlier in 1986. The precipitous COVID-19 drop and long-term forecasts facing us now suggest this one will be far worse.
At that time, many leaders were not well equipped to deal with the severity of the crash and there was widespread concern around capacity to weather the storm. We saw the appointment of more executive chairpersons to drive action in a proactive and hands on manner. In some cases, there was also a subtext to this with investors keen to have someone inside the business ready to immediately parachute into the Chief Executive Officer seat should the need arise.
The austerity felt across the oil and gas supply chain since then has ensured an enduring focus on cost and there is, therefore, some greater inbuilt resilience at an institutional and individual level. However, there are many more precarious liquidity positions with businesses not having had the benefit of a meaningful market upturn for over five years to help cushion the fall into this crisis. With far less in the tank, investors are responding very quickly in this current crisis to protect cash whilst aiming to maintain capacity to grow again when conditions do improve.
There are now increasing demands from investors to broaden boards for the same reasons as they did previously, but in a somewhat less frenetic fashion. Boards are generally more balanced now than they were then. In contrast to 2015, we are also seeing an increase in demand for short-term advisory and restructuring support. With better equipped boards and more confidence in the experience of the current executive, there is an emerging demand for task specific support, working shoulder-to-shoulder with the executive team through restructuring processes, or in repositioning businesses to target new sectors and markets. On the latter point, many companies who could have, did not commit to diversification beyond oil and gas after the last downturn or to the digitization agenda. This has now become an imperative and with a current knowledge and expertise vacuum, they are having to plug these gaps very quickly at both an executive and non-executive level.
Whether for director or advisory roles, there is greater need for deep financial and operational leadership experience as companies have become more distressed far more rapidly. In all sectors, the line between non-executive and executive is becoming ever more blurred in a private equity context. Directors are required to fully commit with time and energy and not operate as solely strategic sounding boards. Some investors have already shied away from the non-executive term all together as it can suggest a more distant and arm’s length approach than is demanded. With many highly seasoned, well connected and energetic executives seeking board and advisory roles, there is also a clear opportunity for private investors to harness this engaged and very relevant talent pool in a cost-effective manner.
There will continue to be a sensible focus on diversity, not just of gender or ethnicity but also of industry background as mentioned earlier to cross fertilize best practices and accelerate critical diversification efforts.
A shakeup of many companies’ boardrooms has already started and we expect to see this accelerating as the world starts to emerge from COVID-19 lockdowns. This will place a much broader burden on boards, requiring careful mapping of non-executive and executive competencies and swift action to add expertise where needed.